Want To Buy Rental Property? 3 Things No One Talks About

buy rental property

Are you planning to buy rental property, make tons of money, then quit your job?

That’s a good idea… and I want to encourage you but…

You first need to know some hard truths. It’s taboo to discuss these “truths” but here goes…

I bought my first rental in 1996 and have been addicted ever since. Rentals have helped my family pay off student loans, helped us become debt free (except for mortgages), and funded college savings. I am grateful. And I feel blessed.

However, I also  feel a growing pressure to say some unflattering things and offer some suggestions, too.

Things Seasoned Landlords Don’t Admit

I really struggled writing this. Mostly because I have to admit that I’ve been duped.

Things aren’t completely as they seem.

But looking back over 20 years, the highs and the lows, the windfalls and losses, I offer you these insights. These are the words I wished someone would have shared with me:

1 – Quantity doesn’t matter – net income does

It never fails. If I’m at a networking event someone will ask, “How many rentals do you own?”

It’s a way to gauge my experience and qualify me for future business opportunities. I get it, no harm – no foul.

It’s just that the question is so misguided. After all, we aren’t farmers growing corn. These are dwellings not acres of land. The number of doors I own only indicates how large my business is, not how profitable it is. Huge difference.

From experience, let me confess that having a lot of rentals won’t make you feel rich. That’s because most of the time whatever cash comes in eventually flow back out. And that’s normally the case when you have a typical 80% Loan-to-Value (LTV) mortgage and only peruse market rents.

It’s very possible to have 10 or 20 rentals with a 1:1 income-to-expense ratio and end up with a $0 net income for the year.

If you’re truly maintaining your rentals, then breaking even before taxes is the norm – you’ve done well.

2 – Striving for passivity postpones your payoff

Ahhh…the glamour of passive income… it’s so very sexy.

It’s the thing late night TV thrives on. And I’ll admit that I’m drawn to those images myself.

Yes, that lifestyle is attainable, but it’s something that occurs towards the middle of your investing career, not at the beginning.

And yes, you can hire everything out, and turn over nearly everything to a property manager, but that will dramatically cut into your net income.

Going passive is a solid plan if you just want to park and preserve your money. But if you’re trying to grow your wealth, the way of a passive landlording is not the way to go. The inefficiencies eat up your gains and postpone the day when you can become more passive.

3 – Market rents + big mortgages lead to decline

If you want to buy a rental, you’ll naturally make that decision based on current market rents. However, if you take an 80% LTV mortgage, by default you’ve set yourself up to own a 1:1 rental. And this goes for no-money-down deals as well.

If you aim for market rent income, you’ll be able to stay afloat but there won’t be much cash left over.

Your rental won’t be able to do the two things you want the most: support itself AND give you spending money.

Because of this, there will be a showdown between you and your rental’s reserve fund. Who will get first dibs at what cash flow there is?

Who gets fed and who will starve?

Typically, the reserve fund loses, and rentals get neglected. Good tenants leave and “good-enough” ones move in. Good-enough tenants won’t care for your place and you can barely afford the annual upkeep yourself… and so it goes.

It’s a cycle of decline.

But there’s an upside

Market rents are the common thread with all of these scenarios.

But you don’t have to accept it. And that is your opportunity.

You don’t have to limit yourself to long-term status quo market rents. You can re-position your rental and break out of the 1:1 box. You’re the owner; you get to decide.

That’s the opportunity before you. Pursue a course away from Craigslist tenants; serve a more profitable niche. But help is on the way…be sure to subscribe so you don’t miss the upcoming series.

Is the 1:1 cash flow-to-expense ratio working for you

Let me know if you disagree with the above. Did I mischaracterize the situation?

Also tell me if you’ve ever re-positioned a rental so that more flows in that goes out. I’d love to hear about it. Leave a comment below.

6 Responses

  1. Hi Al

    Nice read. While a lot of what you are sayin is true or can be true, I also think a lot of it can be controlled of swayed to your favor when the pie she is made. The important thing here is to buy at the right price giving you a nice return on your invested capital (down payment) a 1:1 cash flow/expense ratio would not be what I am for as we all realize unexpected expenses come up as does capital expenses as well.

    I try to treat every property different and base everything off of each individual property vs. having the bars rules like the 1% rule or the 50% rule. These are good guidelines but unsoiled never put myself in a box and love by these…

    I absoljtely agree. With you that there is a non glamorous side of he passive income that gets spoken about very infrequently and cudos to you for writing about it.

    Keep up the good work!!

    Best regards
    Chris

  2. Al Williamson

    Thanks Chris. Yep, having a large down payment helps – but that’s often not the case. Folks need to be aware of the facts.

  3. Julie Vaccari

    Al, Thanks for saying what others won’t say. I am in a position to rent out my primary residence, and I am incredibly grateful that I found your articles today. Living in Las Vegas and having already remodeled my home, your info will be a great resource to help me make extra money with corporate housing. Since I have an HOA and a city ordinance prohibiting leases shorter than 1 month, it seems corporate housing is the perfect solution for me. Wish me luck as I dive into your content! Thanks again!

  4. Al Williamson

    Julie, you’re very welcome. Thanks for the encouragement. Thanks for speaking up too! I feel the shame of not being able to make it as a traditional landlord WHILE having a blog about landlording. Am I alone?

  5. Paul O'Bryan

    Hey Al, I just discovered you after hearing you on a recent podcast (can’t remember which one because I’ve been listening to many). I love what you have to say. I’m a newbie investor and have lots to learn. Thanks for sharing your knowledge.

  6. Al Williamson

    Paul, welcome to the LeadingLandlord community. I’m honored that you’ve joined us.

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